DUBAI (Reuters) - Saudi Arabia's top sovereign wealth fund is negotiating to buy a stake in one of the kingdom's most ambitious real estate projects as Riyadh restructures the economy to cope with low oil prices, a source familiar with the plan said.

The Public Investment Fund aims to invest in King Abdullah Economic City (KAEC) on the Red Sea coast near Jeddah, the source said.

That would inject capital into the business zone, now being developed by Emaar the Economic City (EEC) <4220.SE>, a Saudi consortium affiliated with Dubai's Emaar Properties Group <EMAR.DU>, developer of the Burj Khalifa, the world's tallest building.

Launched in 2005, KAEC had a population of only about 5,000 people and 120 industrial tenants at the end of last year, but says it plans to grow swiftly into a full-blown metropolis.

The chief executive of the city, Fahd Al Rasheed, told Reuters in January its population was projected to hit 50,000 by 2020, with an ultimate target of 2 million around 2035.

Tenants now include French pharmaceutical maker Sanofi <SASY.PA>, a venture involving U.S. battery maker Johnson Controls <JCI.N> and producers of building materials.

But with economic growth slowing sharply because of cheap oil, the government wants such zones to expand much faster and focus more on industries such as tourism, medical care and education to diversify the economy beyond oil and create jobs.

Under economic reforms announced in April, the government said it would work with companies developing major business zones to "revamp" them; KAEC may be the first of those cases.

"What they can do is inject cash. It’s no secret KAEC needs a lot of equity for this project," the source said of the PIF's plan. KAEC, EEC and the PIF declined to comment.

The source, speaking on condition of anonymity because the matter is not yet public, said the PIF could either buy a stake directly in KAEC and serve as a partner to develop the project along with EEC, or take a stake in EEC itself.

EEC obtained a 5 billion riyal ($1.33 billion) loan from the Saudi Ministry of Finance in 2011, which has been extended until 2026, and the source said the company had a similar amount of debt to commercial banks.

An investment by the PIF in the economic city would be a step in the fund's development as one of the most important institutions in the Saudi economy, using its financial power to push projects which the government considers vital.

Under the economic reforms, the government has said it will expand the PIF from 600 billion riyals to over 7 trillion riyals, by giving it assets such as ownership of state oil giant Saudi Aramco. That would make the PIF the world's biggest sovereign fund by far, on paper though not necessarily in terms of the cash it had available for investment.

The PIF will invest abroad - in June, it bought a stake in U.S. ride-hailing firm Uber for $3.5 billion - but it will focus much of its money and management attention on domestic projects designed to reduce Saudi Arabia's reliance on oil exports.

For example, the PIF will take over Riyadh’s floundering King Abdullah Financial District and restructure the project, sources have told Reuters. It is also expected to get involved in developing a Saudi shipbuilding industry and in restructuring state firms such as utility Saudi Electricity Co <5110.SE>.

The PIF will "help unlock strategic sectors requiring intensive capital inputs. This will contribute towards developing entirely new economic sectors and establishing durable national corporations," the national reform plan reads.